Cutting Costs to Increase Impact

Published by Stanford Social Innovation Review, Feb. 2017, written by Leslie MacKrell, Andrew Belton, Mark Gottfredson, and Jake Fisher:

 

 

 

 

 

Akshaya Patra and College Summit, nonprofits operating on different continents half a world apart, at first glance appear to have almost nothing in common. Akshaya Patra is an India-based organization that provides lunchtime meals for 1.6 million students, while College Summit is a US-based organization that helps thousands of low-income high school students prepare for college and a career. One operates a massive network of kitchens and delivery trucks; the other uses peer influence and organizing techniques supported by trained educators and coaches.

Despite their radically different contexts and missions, Akshaya Patra and College Summit share an essential trait: Both put cost at the center of their plans to achieve impact at a large scale.

For Akshaya Patra, a focus from the start on designing a lowcost model means that each additional meal it serves costs only pennies, even as it prepares higher-quality meals than those its peers can offer. In College Summit’s case, a recent product redesign achieved dramatically lower costs per school served, meaning that College Summit can work with 600 percent more schools in the coming years for only a 60 percent increase in the organization’s budget. For both organizations, cost is a lever rather than a barrier because having lower costs per unit presents the opportunity for greater scale.

The link between cost and scale isn’t news to the private sector. For decades, leading businesses have validated the advantages of being a low-cost player and reducing costs over time. Bain & Company research on more than 70 industries, both product- and service-related, has found that costs decline reliably by 20 to 30 percent each time an industry’s accumulated experience at delivering that product or service doubles.1 In light of this predictable cost curve, it’s no surprise that in a 2012 survey of industry-leading companies, more than 40 percent said their key competitive advantage was their ability to keep costs low.2

It makes sense to find strategic advantages by being lower cost in a competitive market, but can similar benefits accrue to social sector organizations? We believe the answer is “Yes.” Akshaya Patra and College Summit are not anomalies. We have seen other organizations:

  • Access new revenue:The Diabetes Prevention Program (DPP), developed by the US National Institutes of Health, demonstrated for the first time that lifestyle changes can outperform medications in preventing type 2 diabetes. The problem was that the DPP’s one-on-one clinical model was too expensive for widespread use. Then theYMCA of the USA adapted the program so that trained Y employees could deliver it to groups, cutting the DPP’s cost to serve by 75 percent and simultaneously making it easier for DPP content to reach many more people. Evidence that this adaptation worked persuaded insurers to reimburse the cost of the program, opening the door for widespread use.3
  • Expand their service footprint dramatically: The Financial Clinic builds the financial security of working poor families by enabling social service providers (staff at domestic violence shelters, for example) to deliver financial coaching to their clients. However, over time, The Financial Clinic could not meet a growing demand because of the time and expense of training providers. To address that challenge, it developed the Change Machine, an online training platform. As a result, the number of practitioners prepared to coach clients has increased fivefold over an equivalent prior period when The Financial Clinic was still training its practitioners face-to-face, and growth continues to accelerate.
  • Reduce resource hurdles to growth: India’s Educate Girls uses a community-powered approach to enroll and support girls in school. Basing its operating model on trained volunteers means that startup costs in a new location are lower than would be the case with a fully paid-staff model. An added benefit is that this local expertise increases the model’s local relevance.

Despite these advantages, thinking about cost as a lever for scaling impact is not yet standard in the social sector. In The Bridgespan Group’s 2015 Nonprofit Management Tools and Trends Report, cost analysis tools ranked 14th of 25. And, at a recent gathering of nonprofit leaders on this topic, when asked about the cost of their organization’s key initiatives, most reported that costs had gone up rather than gone down or stayed the same. It appears that the landscape hasn’t changed much since 2012 when Matt Bannick and Eric Hallstein from the Omidyar Network noted in Stanford Social Innovation Review: “In general, we find that despite its potential value for driving financially sustainable growth, few nonprofits focus on reducing cost-to-serve.”4

If our impact goal as a sector is to broaden beyond “what works” to “what works and is scalable,” then we must develop solutions that achieve outcomes and have innovative low-cost structures. We believe the time is right for social sector leaders who aspire to scale to consider cost as a critical lever. To that end, we propose a simple framework for spotting and testing opportunities across the service design and delivery chain to reduce cost, as well as examples of organizations that have done so. We hope to encourage readers to consider what opportunities for scaling their own work might be unlocked through a focus on designing for low cost or lowering current costs.

Cost as a Lever: What It Is, and Isn’t

“Cost” may be a cringe-worthy term for some in the social sector, conjuring visions of squeezing already tight budgets and struggling with starved overhead. For organizations with razor-thin operating margins, we understand what it feels like to wish to grow but not see where the resources will come from. Although it may seem that the only way to grow is to stretch staff even further or skim dollars from current programs, these are not the cost reduction measures we are talking about.

We are proposing that cost be looked at not as something done to an organization but rather as a lever within the control of a provider. Cost can be designed and managed through decisions about the target problem and expected outcome, target scale, service design, and delivery method. It means significant adjustments to the service design that fundamentally make it less expensive to deliver, and therefore enable expansion in a sustainable way.

Because cost reduction should be in service of increasing impact, we recommend thinking about cost on a per-unit-served or, ideally, a per-outcome basis. In other words, nonprofits should aim to minimize the cost of achieving each additional unit of impact. This approach makes it more feasible to fund more units of impact through the same or new revenue streams.

Some organizations, such as Akshaya Patra and Educate Girls, launch in environments where there is little philanthropic infrastructure and limited government contributions to fund promising interventions. In these settings, any intervention must be intentionally and dramatically low cost right from the start if it is to be successful and sustainable—high-cost models simply won’t get off the ground.

Far more typical in the United States, however, are organizations such as College Summit. It, like many nonprofits, operates in a context where a more developed social infrastructure and robust philanthropic sector can encourage what Desh Deshpande— entrepreneur, social innovator, and major supporter of Akshaya Patra—calls “gold polished” social programs. “You may need to bring change to 14 million children, and then you come up with an after-school program for 1,000 to 2,000 kids, and you feel very good about it,” explains Deshpande. “The fact is: you’re serving 2,000 children, but your solution is so expensive and so involved that you have no chance of actually expanding it to 14 million children.” For these organizations, the challenge is to manage a dramatic reengineering to the cost structure of a service or product in order to make it more affordable and scalable.

Taking the First Step: Clarifying the Most Important Outcome

The first step to reducing cost in a way that increases your organization’s ability to achieve its mission is to get very clear answers to three questions: What is the specific outcome your service or product exists to deliver? To whom? And how do you know when you have been successful?

For many organizations, answering these questions is difficult because their offerings over time have become diverse and complex, motivated by genuine beneficiary need, funder encouragement, or a desire to expand. However, it’s worth engaging in this exercise because the data show that complexity is costly in myriad obvious and hidden ways throughout an organization. Research on the impact of simplification found that the least complex private sector companies grew on average 30 to 50 percent faster than peers.5 Prioritizing your most important outcome guards against features, services, or mission creep that can add cost without significantly improving impact and ultimately add up to an intervention that is too costly to scale.

How can you determine your most important outcome? One way is by reviewing data (internal and external). Another is by asking your customers or beneficiaries. Both of these approaches will help you take a fresh look at the challenge you are in business to address and the specific contribution you’re best positioned to make.

Reviewing data | According to internal data, what outcome is your organization currently achieving? If you have multiple outcomes, what do you achieve most, and most reliably? What outcomes do external data indicate are most predictive of sustainable change in your field?

Asking customers and beneficiaries | Why do people use your service or product? When you ask them what tangible or reliable value they have received from your efforts, what do they say? If there are fees or payments involved, what are people willing to pay for? College Summit’s leaders were motivated to refine its outcomes and service model by the realization that “business as usual” was never going to achieve its ambition to close the gap between the percentage of low-income students in the United States who aspire to attend college and the percentage that actually enroll and persist. Product-feature proliferation and high customization on the ground had, over time, increased the cost of the organization’s school-based product and made its programs challenging to manage consistently. In addition, since College Summit’s launch 20 years earlier, the college-access landscape had changed significantly so that elements of its work were no longer unique.

To break through the scale barrier, College Summit leaders began by reviewing the organization’s prior evaluations and academic research, and commissioned a national survey of school administrators. They also established a small pilot program to test what it believed to be its most essential outcomes and the most important programmatic drivers of those outcomes. They sought to elevate the subset of outcomes most strongly correlated to student success and linked to College Summit’s demonstrated competencies, the strongest and most unique of which was the ability to develop and direct peer influence.

True cost innovation is about achieving impact at a cost low enough to expand in a sustainable way. How low must costs go? There’s no magic dollar amount, nor should there be, given wide variation in program design, intensity, and context.

Three discrete student milestones fit the bill as College Summit’s most important outcomes: early submission of federal student aid forms, applications to multiple colleges, and completion of a career plan that specifically links desired profession to educational and other experiences required. As a result, College Summit is now laser-focused on achieving these measures via peer influence and is no longer focusing on other areas, such as measuring how effectively optional College Summit curricula are being used.

Estimate Likely Funding Available at Scale

True cost innovation is about achieving impact at a cost low enough to expand in a sustainable way. How low must costs go? There’s no magic dollar amount, nor should there be, given wide variation in program design, intensity, and context. What you seek is not necessarily an extremely low cost, but rather a context-appropriate cost that explicitly links an impact model to a funding model. This means getting unit costs in the ballpark of what would be reasonable to expect likely funding sources to cover at your target scale.

In Akshaya Patra’s case, the government provided $15 annually per student to fund school lunches. Akshaya Patra didn’t believe that quality, nutritious, hot meals could be delivered for this amount. But it wanted to stay close to the $15 government contribution to limit the need for philanthropic subsidy and minimize cost as a barrier to scale. It settled on $30 per year per student after determining that it was feasible to raise $15 per student from philanthropy.

College Summit also considered “funding available at target scale” when it aspired to develop a product that could reach at least 1,000 high schools, a meaningful percentage of high-need schools in the United States. That meant holding the line on its philanthropy fund-raising and figuring out what schools could afford. Through market research, College Summit learned that few schools could afford more than $15,000 a year. So College Summit set out to build a product it could deliver at the desired cost given this blend of revenue sources.

Fit Cost per Outcome to Target Scale

Given the urgency of scalable solutions in every corner of the social sector, it seems reasonable to start the process of developing a program or service by establishing a target outcome and a target cost per unit of outcome. But then comes the challenge of developing an intervention that balances cost with successful outcomes. There’s no cookie-cutter approach. But experience in the private sector and by social innovators shows that costinnovation opportunities can be found in one or more of four key stages of bringing a product or service to market: design, sourcing, production, and delivery…

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